Financial Fraud, Scam and Identity Theft


Bankruptcy Fraud: How To Identifying And Wich Are Common Fraud Schemes

Ponzi Schemes (Investor Fraud)

A Ponzi scheme (pyramid) invoices soliciting investments by promising interest rates well above the market rate. Early investors recover their investments with the promised rate of return and encourage others to invest. As the pyramid begins to crumble, investors are unable to recover their original investments and interest is no longer paid. Chapter 11 cases are filed to allow the debtor to continue the scheme.


When the scheme collapses before bankruptcy, either a voluntary or involuntary case  is filed.

The essence of these schemes is a promise of a very high return on an investment. Once it fails, many investors are reluctant to complain because they realize they have been duped. lt is important to identify and contact the investors because they generally are excellent witnesses.

Examples Of Investor Fraud Schemes

Real Estate Schemes: Limited partnership interests and/or mortgages on residential property are sold to investors. The real estate securing the investment is insufficient to support the shares or interests sold. Additional funds are removed from the investment properties through large management and general partnership fees paid to insider companies. Investments are commingled. Numerous and complex banking transactions make it almost impossible to trace funds.

Church and Ethnic Schemes: An individual solicits funds from members of his church or religious faith. Investors believe in the individual because of his affiliation with their church and, therefore, trust him with their money without making the appropriate inquiries. Likewise, members of ethnic groups are targeted by members of their community. Shared language and ethnic background allow the perpetrator to win the trust of his victims. Recent immigrants are often targets of these schemes. In both situations, the victims are reluctant to believe that their trust has been betrayed and, therefore, may be unwilling to complain about the perpetrator.

Overseas Funds Needing U.S. Investment: These operators promise that they have an overseas investor who needs aid in moving money to this country. The investment fund will pay a very high return for the use of the victim’s account and aid in transferring the money. The victim has to put up money to help start the transfer. The overseas investment never occurs.


Advanced Fee Swindle: This is a variation of a Ponzi scheme. Either through advertisements or direct contact, individuals or businesses in financial trouble are contacted and offered generous loans. The loans require an advanced fee to guarantee the loan and start the loan processing. The perspective borrower is assured “nothing will go wrong–the loan is done as soon as you send in the advanced fee.” Of course, once the fee is sent, something does go wrong and the borrower is in even deeper financial trouble.

Red Flags/Common Characteristics

· Numerous contacts from investors/creditors about the case
· List of creditors, schedules and statement of financial affairs show mostly unsecured debt owed to numerous individuals
· No prospectus or the prospectus provided is untruthful
· Numerous complex investment vehicles, such as limited partnerships
· Enormous management or general partnership fees to insider controlled companies
· Monthly operating reports show receipts from individuals
· Income is from individuals with little or no other outside income shown
· Lulling letters to investors explaining that the delay in their interest/loan/deal payment is outside the control of the manager and, if they will be patient or continue to send money, the problems will be resolved

Civil Responses To Consider

· Immediate appointment of a Chapter 11 trustee or an involuntary “gap” trustee
· Object to an individual debtor’s discharge
· If a criminal investigation is pending, request that as part of any plea agreement the debtor agrees to waive his discharge or, if the debtor is convicted after the trial, that the entire bankruptcy debt be imposed as restitution

· Coordinate communication with investor creditors, e.g., establish telephone hot lines, hold investor informational meetings, ensure notices to creditors are complete and understandable, etc

Criminal Responses To Consider

Mail-Fraud, 18 U.S.C. Section 1341: Misrepresentations to investors and the use of U.S.mail.
Wire Fraud, 18 U.S.C. Section 1343: Misrepresentations to investors and the use of interstate wires.
Bankruptcy Fraud, 18 U.S.C. Section 152: Concealed assets or false statements to the court at the 341 meeting of creditors, or in court filed documents including the schedules and statement of financial affairs.
Bankruptcy Fraud, 18 U.S.C. Section 157: Where the bankruptcy system is used in any way to aid the fraud. In many investor fraud cases, the bankruptcy system is used to complete the fraud, delay the investigation of the scheme and/or to confuse the victims.


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